The Stability Pact

Events in the European Union, particularly yesterday and today, resemble scenes from the theater of the absurd. The recurring political farce results from the inflexible rules contained in the infamous Stability Pact, which are in turn the outgrowth of financial stubbornness. Germany and France, the EU’s two biggest economies, are facing the prospect of sanctions after failing to redress their big public deficits. In other words, countries like Greece, Ireland, Portugal and Finland will be recommending to the French and Germans measures on how to manage their economy. In the past, Berlin had put strong pressure on other EU member states to endorse the Stability Pact, as a means of imposing fiscal discipline on smaller nations – especially the wasteful ones to the south and the costly welfare states in the north. However, the rigidity of the model made it too binding and thus ineffective. In fact, the Stability Pact was doomed from the start as virtually all eurozone members that were responsible for the pact were also turning a blind eye to its demands. EU governments resorted to all sorts of accounting tricks in order to fulfill the criteria for EMU membership. When, for politically expedient reasons, the conservative government in Portugal disclosed the extensive book-cooking by its Socialist predecessor, provoking warnings from Brussels, everyone thought that Lisbon was upholding the pact’s purpose. However, when Germany and France turned out to be the next on the list of states to breach the rules, people began to realize the absurdity of the pact. The problem demands a lasting solution and not merely temporary, face-saving compromises. No one questions the need to reform Europe’s public economies – Greece’s included. However, fiscal crises cannot be tackled in a vacuum without taking into consideration the broader economic conditions. More flexibility is needed when the times call for it. This is essential for Greece, a country which needs to tidy up its fiscal economy but also to implement development policies that will enable it to close in on the EU average. What we need is not to impose big fines on France and Germany but rather to find solutions that will boost their economies – and which will have a positive spillover for all European nations.